March 2010 Archive for Out to Pasture

Since last we visited, China's recalcitrance has drawn the attention of editorialists far wiser than I. And, in fact, President Obama, both houses of Congress and China’s top finance officials have weighed in, as well.

You may recall that I was arguing, a bit lamely, one might suggest after watching the likes of Paul Krugman make pretty much the same argument, that it’s time for the U.S. to at least act like it’s going to call China’s bluff over currency valuations.

Krugman, the very liberal, but Nobel Prize-winning, economist who writes for the New York Times and occasionally shows up on that Sunday morning news panel to lose arguments with George Will, seems to agree. Last week, he published a column in which he accused China of maintaining “the most distortionary exchange rate policy any major nation has ever followed."

His column created a lot of buzz, and not just because he used a word my copy of Webster’s Unabridged and I agree should have been “distortive.”

Krugman swings a big enough abacus with the Obama-types to get the attention of anybody with any interest in U.S.-China trade. Within days, a bipartisan bunch of congressmen had asked the Administration to impose tariffs on Chinese imports. Sen. Chuck Schumer (D-NY) and four other senators introduced a bill that would force the Administration to put more pressure on China.

Obama himself suggested China should loosen its monetary policy to help the world economy recover. I’m not accustomed to agreeing with all of the above.

Indeed, the Wall Street Journal editorial board—with whom I agree rather often--worried that there is a trade war budding. They said that “at the core (of the protectionist sentiment) is a basic misunderstanding of monetary policy. There is no free market in currencies, as there is in wheat or bananas. Currencies trade in global markets, but their supply is controlled by a cartel of central banks, which have a monopoly on money creation. The Federal Reserve controls the global supply of dollars and thus has far more influence over the greenback's value than any other single actor.”

The Journal argues that China pegging its currency to the dollar “has served the world economy well, leading to an explosion of trade, cheaper goods for Americans that have raised U.S. living standards, and new prosperity for tens of millions of Chinese.”

My sentiment, exactly. If I learned anything in college economics it’s that we don’t ever want to see the world go Smoot-Hawley again. But it’s not just the yuan I’m talking about. China’s monetary policy is a pressure point our guys should use to force them to open their market to, among other things, U.S. beef. We take their junk by the container load. They should take our beef.

I want that market. That country—the melamine capital of the world, mind you—keeping U.S. beef out on flimsy safety concerns is unacceptable.

But I don’t suppose I’d want a real trade war over it. Smoot-Hawley, you’ll recall, sprang from a worldwide economic slump and is widely blamed for making the Great Depression more depressing. But it’s a chance I’d take to get some reciprocity.

Krugman—and remember, he’s got a Nobel Prize, so you know he’s smart if occasionally misguided—makes the same point I made in our last visit. I said if you owe the banker enough, he’s got to work with you because what hurts you hurts him.

Krugman says “It’s true that if China dumped its U.S. assets the value of the dollar would fall against other major currencies, such as the euro. But that would be a good thing for the United States, since it would make our goods more competitive and reduce our trade deficit. On the other hand, it would be a bad thing for China, which would suffer large losses on its dollar holdings. In short, right now America has China over a barrel, not the other way around.

His fix: “In 1971 the United States dealt with a similar but much less severe problem of foreign undervaluation by imposing a temporary 10% surcharge on imports, which was removed a few months later after Germany, Japan and other nations raised the dollar value of their currencies. At this point, it’s hard to see China changing its policies unless faced with the threat of similar action — except that this time the surcharge would have to be much larger, say 25%.”

That would be quite the shock, indeed. Or, waved around properly, quite the stick. I’m not sure I agree it should be so draconian, but then I often disagree with Dr. Krugman.

I do agree with his final statement: “I don’t propose this turn to policy hardball lightly. But Chinese currency policy is adding materially to the world’s economic problems at a time when those problems are already very severe. It’s time to take a stand.”

This column is part of the Beef Today Cattle Drive e-newsletter, which is delivered to subscribers biweekly and includes beef industry analysis, market information as well as the latest beef headline news. Click here to register.

Can you believe that Lyle Lovett was married to Julia Roberts? Have you seen a picture of the man? Did you know he’s an Aggie? Where is the symmetry in a relationship like that?

Which reminds me of our trade deficit with China.

Our place is on a highway the wide load people use. You often see big tanks and those big windmill parts moving north.

The windmills travel in caravans and one intersection between here and town is occasionally blocked for a while by wide load flaggers keeping you from running into them while they make a left turn.

Last year or so, I got chatting with a flagger who said all the windmill parts were made in China, shipped to the U.S. then hauled to the construction sites. He was on his way from one of the Gulf ports to Wyoming. So, when our President announced that he was going to stimulate all those green jobs, my first question was “how many wide-load flaggers do we really need in the U.S.?”

Last week, Congress noticed what the wide load flagger told me back then and some want to pass a law that says not to buy Chinese windmills. That strikes me as a bit protectionist. I mean, if China can build big windmills cheap enough to ship them across the ocean and then haul them 1,500 miles to Wyoming cheaper than we can build the things, I want that to be ok. Why pay more?

It worries me to be passing laws that seek to protect individual products from fair trade. Once you start that, you’re giving more power to the “special interests” who have the most friends in Congress and giving Congress more power they can sell to the special interests.

I don’t like that. I support NAFTA and free trade for several reasons—not least of which is that I think a rising world-wide tide will make a safer and more just world. I think if everybody plays by the rules, we can all prosper.

It’s that “play by the rules” part that has me thinking about China..

In my admittedly rural brain, China assuming that the U.S. market is a “given” is like Lyle Lovett taking Juliet Roberts for granted. I mean, hey, who’s going to suffer most after the divorce?

I never thought I’d see me write this. Our countries’ marriage is so important to both of us that you’d think China would be more loving than they seem inclined to be. I mean, if we get in a trade war with them, we can always go without—or tool up to make our own—plastic cups, Swedish furniture, cowboy boots, Toyota floor mats, baby food, trash cans, huge TV sets and all that other stuff we’ve outsourced. Stuff would cost more, but everybody in America has junk aplenty, anyhow.
But their people, without the U.S. market to keep the factories open, would go back to starving and standing in front of army tanks.

Nonetheless, we can’t get enough legal beef into China to keep a lapdog fat. This is because they want to sell us their chickens. Granted, we’re being silly. We could give them free access to any food product without worrying about the competition. Who’s going to buy a chicken from China with their bad press?

But our government, in its ongoing attempt to slow human evolution by protecting the dumbest among us, has banned Chinese chickens. To get even, the Chinese won’t let our beef in.

This seems such a tiny bit of their trade with the U.S. you’d expect them be a little more flexible. They would be if they didn’t take us for granted.

After all, in 2009, they bought just over $69 billion of our goods, most of which they need. We bought $296 billion worth of their junk, most of which we merely want.

Beef is not their biggest transgression, however. Our whole government—from the Administration to Congress—continues to complain about China’s refusal to adjust the value of their yuan. They’ve got it pegged at 6.83 to the dollar.

So, as our government borrows and spends enough to drive the dollar lower on international markets, the yuan follows. The self corrective way this is all supposed to work is as one country acts stupidly—that would be us—the value of its currency goes down, while the currency of a country with sane economic policy—that would be China—would go up.

That would make our products more competitive and their products less so. So their consumers would buy more U.S. stuff, like beef, and ours would buy less of their stuff. Like everything else. There would be some leveling effect, pulling them down and us up, and helping correct the problem.

It’s not working that way. They’re too impatient for growth. They should be willing to share the world’s slowdown. Instead, while we’re mired in 9.7% unemployment, they’re projecting 8% growth in GDP this year. (Most of which, by the way, will come from our pockets. To make it all madder, a lot of their growth will come from stimulus funds Obama borrows from them to buy windmill parts from them! It’s like China is our “company sto’,” as Tennessee Ernie would call it. They loan us money to buy their stuff and keep the profits on both ends.)

Everybody’s scared to make China mad. But we’ve got lots of leverage with these guys. We’re their biggest market, by a wide margin. And we owe them jillions. Of course that last part is a problem, from one perspective. You don’t want your banker to hear everything you say about him at the coffee shop.

On the other hand, there’s the way an old cattle feeder told me once. “If you borrow $10,000 from the bank to buy a car and you can’t pay, that’s your problem. If you borrow $10 million and can’t pay, it’s THEIR problem.” Then, they work with you.

Free trade or no, I think it’s time the U.S. show some backbone with China. Maybe it would make some of our other trading partners take us less for granted.

This column is part of the Beef Today Cattle Drive e-newsletter, which is delivered to subscribers biweekly and includes beef industry analysis, market information as well as the latest beef headline news. Click here to register.